Bourse closes in on bear territory as yuan sinks

The Hang Seng Index slumped by as much as 551 points before pulling back and the yuan plummeted to a fresh six-month low as China's disappointing manufacturing data added to the bleak outlook.

The loss narrowed to 362 points, or 1.94 percent, at the close, sending the benchmark index to the lowest in more than six months at 18,234 points. It had declined nearly 20 percent from a recent high in January.

If it had closed down 20 percent, it would confirm the HSI was in a bear market. Market turnover reached a four-month high of HK$171 billion yesterday and the Hang Seng Tech Index retreated 2 percent.

Tech, oil and property sectors were the biggest laggards. Meituan and NetEase lost nearly 5 percent while the big three state-owned oil giants shed from 3.1 to 5.4 percent.

Shares of Hong Kong and mainland developers fell, with Henderson Land Development and Country Garden dropping 4.1 and 3.4 percent.

In May, the HSI plunged by more than 8 percent and the tech gauge by 7 percent.

In the A-share market, both the Shanghai and Shenzhen composite indexes slid more than 0.6 percent.

But Financial Secretary Paul Chan Mo-po believes the Hong Kong stock market still has a lot of room for development, given the relatively low ratio of its market cap to China's gross domestic product.

Chan said at a meeting yesterday that the market value of local stocks accounted for only 28 percent of GDP in March and reached only 98 percent together with shares in Shanghai and Shenzhen, falling short of the New York and Nasdaq bourses combined that had a value of 1.7 times of US GDP.

In the currency market, the onshore yuan weakened 164 basis points to a new half-year low of 7.1065 per US dollar. It dropped more than 2.5 percent last month. The offshore yuan also reached a six-month low, making the loss in May 2.9 percent.

Zhang Zhiwei, chief economist at Pinpoint Asset Management, said: "The sentiment in the financial market is quite bearish. It is not clear how the government interprets the current economic condition. There is no sign of imminent policy response."

China's manufacturing purchasing managers' index fell to 48.8, official data showed, the lowest reading since December 2022 and weaker than an estimate of 49.5. A reading below 50 signals a contraction from the previous month.

A non-manufacturing gauge of activity in the services and construction sectors slid to 54.5 from 56.4 in the previous month, also below expectations.

"We reckon that the Chinese economy could be on the verge of a self-fulfilling confidence trap and believe decisive policy actions are needed," a Citigroup economist said after the PMI data release.

The People's Bank of China will probably cut the interest rate on its medium-term lending facility by 20 basis points in the remainder of the year, said Citi, and reduce the reserve requirement ratio for banks by 50 basis points. Fiscal stimulus is limited, though, and structural easing measures may be taken.

aiden.he@singtaonewscorp.com